Congress Clashes Over Workers' Tax Break : Legislation: The GOP is seeking to restrict the earned-income credit and expand exemptions for the affluent. Democrats are railing at the 'injustice.'

TIMES STAFF WRITER

A popular tax break for the working poor has taken center stage in the budget debate raging in Congress, with a Republican cost-saving proposal fueling new charges that GOP leaders are favoring the rich while seeking undue sacrifice from the needy.

What is remarkable about the Republican push to restrict the earned-income tax credit, Democratic critics say, is that it would burden a group that seems to embody the cherished conservative ideals of self-sufficiency and free enterprise.

Moreover, it is moving ahead at a time when Republicans propose easing taxes for the affluent, such as expanding a tax credit that benefits estate heirs, along with a cut in capital gains and certain corporate taxes.

"This Republican attack on the [tax credit] is unconscionable," Labor Secretary Robert B. Reich argued in an interview, saying that the proposals "run the risk of offending Americans' basic sense of fairness, fair play and equal sacrifice."

The tax credit, which until recently enjoyed broad, bipartisan support, was launched 20 years ago as a way to help struggling wage-earners stay above the poverty line. Those who qualify--mostly workers at the bottom of the pay scale but some at higher levels--get a special reduction on their tax bills or even a check in the mail, sometimes in excess of $3,000.

GOP budget-cutters say that the program, while not without merit, has ballooned into a case study of costly, wasteful, ever-expanding government. To rein it in, they would take the credit away from workers who have no children and, through technical changes, curb future benefits for millions of others.

Social Security income would be counted as wages, reducing the tax credit for many families.

"Our [tax credit] reforms are designed to cut fat while protecting the benefits of the working families who need help the most--working moms and dads who are struggling to get off welfare and into work," said Rep. Bill Archer (R-Tex.), chairman of the House Ways and Means Committee.

The proposed restrictions, which have advanced through House and Senate committees, would reverse much of a 1993 expansion of the credit that the Clinton Administration touts as a major accomplishment in the fight against poverty. The credit has grown in importance as the minimum wage, another safeguard for the working poor, continues to be eaten away by inflation.

Yet the tax credit's price tag has increased drastically: The benefit now costs about $25 billion, up from $2 billion in the mid-1980s, and it would continue to expand rapidly without new restrictions. Budget-cutters like to point out that the credit has been widely abused, yielding fraud and error rates of more than 20% in the past.

Indeed, some analysts applaud their efforts, which only would slow the pace of program growth, not actually cut it. Critics note that, while the benefit gradually phases out above incomes of $11,630, a family of four with about $28,000 in annual income still qualifies for a small credit.

"We ought not to be subsidizing citizens who have incomes above $28,000," said Marvin Kosters, an economist at the American Enterprise Institute, who believes the program should be slashed in half.

Whatever the merits of the arguments, the debate has become supercharged by the question of fairness to the rich and poor, as the House considers cutting $23 billion from projected growth of the credit and the Senate $43 billion. In the fight over federal responsibilities for the needy, the little-understood tax credit has taken a prominent place alongside welfare and Medicaid as a major issue.

It is a technical issue, however, with many of the fine points difficult to grasp.

While a wage of $28,000 or $30,000 might not fit most people's definition of poverty, for instance, some maintain that it is difficult to push the figure much lower. Without a partial benefit that extends into the moderate-income range, they say, some low-wage workers would face what amounts to a tax penalty for earning extra wages.

Moreover, defenders of the tax credit point out that only a small percentage of the outlays go to households earning more than $20,000.

"How does one explain raising taxes on someone earning $20,000 a year and cutting taxes for someone earning $220,000?" asked Robert Greenstein, director of the Center on Budget and Policy Priorities, a liberal think tank in Washington. "Frankly, I think the Republicans have made a serious political mistake here."

Democrats are trying mightily to capitalize on the imagery of 20 million working people--the current number of beneficiaries--facing a significant economic setback if the Republicans have their way.

Greenstein's policy center recently faxed to news organizations the phone numbers of a plumber's assistant, a receptionist in a factory and single mothers who have relied on the tax credit to help pay doctor's bills, car payments, rent and other of life's necessities.

Adding heat to the issue is the reality that Republicans are seeking to roll back other taxes even as they would impose new restrictions on the working poor.

The House, for example, already has approved expanding the tax exemption affecting estates, so that the $600,000 now shielded from taxation would be phased up to $750,000 in 1998 and then indexed to inflation.

The Senate Finance Committee will soon consider a range of tax cuts, including expanding the estate tax exemption to $1.5 million for family farms and other family businesses and lowering the tax for higher amounts. Only about 1% of estates are big enough to exceed the $600,000 limit, according to estimates.

The House has also approved a capital gains tax cut and expanded corporate tax breaks.

"From a Democratic point of view, the cat's out of the bag--the Republicans are favoring the rich," declared Kent Weaver, a political scientist at the Brookings Institution. "They're not interested in helping the working poor escape from poverty. They're not interested in having work pay more. And I think there's some validity to that."

There are other ways to argue the issue, of course, with tax-cutting Republicans in broad agreement that their policies would unleash a round of vigorous economic growth, new jobs and income gains that ultimately would raise living standards for everyone.

It is also argued that childless workers have less of a claim on the earned-income tax credit than their counterparts with children, because the government has a special responsibility for the well-being of children--and children cost money to raise.

Some Republicans say that they are acting in perfect harmony with the program's original mission and that it is unfair to Republicans to label their proposals a tax increase.

"President Clinton has chosen to lash out at our [tax credit] reform efforts, claiming we are raising the taxes of the working poor. That is not the case," said Sen. Don Nickles (R-Okla.). "Our reforms restore this program to its original purpose--helping with the tax burden of working families with children."

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